S&P 500: Forming A Reluctant Top

 | Sep 25, 2017 02:27AM ET

Current Position of the Market

S&P 500 Long-term trend: The uptrend has pushed a little higher, near-term.

S&P 500 Intermediate trend: We may be in a position to get “something” started on the downside.

Analysis of the short-term trend is done on a daily-basis with the help of hourly charts. It is an important adjunct to the analysis of daily and weekly charts which discuss longer market trends.

Market overview:

As anticipated, S&P 500 did not stop precisely at 2500, but pushed higher to almost 2509 before reversing. That reversal probably means that we have made a top, but what kind of a top is still undecided. There is a cycle low due in early October which could well take the index down into that time frame, but there has not been enough distribution to initiate more than a fifty-point decline at this time. It is uncertain what will come next, but there is another minor cycle due toward the end of October. So, the question is, will these bottoming cycles (and potentially others) be enough to keep the market in a downtrend, forming re-distribution levels along the way which will allow it to achieve a decline of intermediate proportion? That’s what we will need to do in order to preserve the reputation of the decennial pattern ending in seven!

Perhaps the four-year presidential cycle will come to the rescue. According to the proponents of that theory, history suggests that stock prices will be weakest in the second half of the first year, and the first half of the second year of the 4-year presidential cycle. We have entered that period of purported weakness, so let’s see if it holds up to the historical pattern.

Technically, the weekly indicators have improved slightly, while the daily have weakened but still have not given a sell signal. Actually, though helpful, it is not really necessary to know ahead of time when cycles will make their lows since technical indicators should warn of approaching strength and weakness, and P&F charts should tell us how much should be expected of each reversal.

Analysis: (These Charts and subsequent ones courtesy of QCharts.com)

Daily chart

Here is the information we can derive from analyzing the daily chart of the S&P 500: By initially focusing on the larger blue channel from 1810, we can see that the intermediate trend is decelerating since the index has not been able to rise to the top channel line. On the other hand, the deceleration – often a precursor to a reversal -- is not severe enough to immediately challenge the bottom channel line which is still some one hundred and thirty points away.

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The price action contained within the green channel shown on the chart tells us that the short-term trend is still alive and well since it rose to the top of the channel, but that makes it overbought and we can see that the oscillators at the bottom of the chart have started to roll over, warning that we can expect a correction to take place as soon as the index price breaks out of the last minor up-channel. That will probably correspond with the oscillators turning negative and giving a sell signal. If my assessment that a small cycle low is due in early October, we are looking at a decline which will last about two and a half to three weeks and, according to the degree of distribution at the current top, it should amount to about 50 points. That should bring us down to the vicinity of the lower green channel line, which could provide some support and, if met at the low of the cycle, possibly reverse the short term trend.

After that, we will need to see how much of a rally develops and what the indicators tell us. If our oscillators are sluggish and have difficulty getting back into an uptrend, we could be at risk of breaking through the lower channel line and extending the correction. If this should occur, by the time it happens another congestion pattern should have formed which will help us gauge the extent of the subsequent decline.

For now, unless we get some renewed strength early next week, the scenario depicted above should come to fruition. Now let’s move on to the hourly chart to see if we can add some refinement to this analysis.